Question 1

A firm has a market value equal to its book value. Currently, the firm has excess cash of $990 and other assets of $10,010. Equity is worth $11,000. The firm has 500 shares of stock outstanding and net income of $2,250. The firm is going to use all of its excess cash to repurchase shares of stock. What will the stock price per share be after the stock repurchase is completed?

Accepted Answer

The firm has a market value equal to its book value, so the market value of equity is $11,000. The firm has 500 shares of stock outstanding, so the current stock price is $11,000 / 500 = $22. After the stock repurchase, the firm will have 500 - 990 / 22 = 450 shares of stock outstanding. The market value of equity will still be $11,000, so the new stock price will be $11,000 / 450 = $24.

Question 2

Gordon's Meats has 6,500 shares of stock outstanding. The market value is $26.50 per share. The balance sheet shows $48,200 common stock account, and $142,900 in the retained earnings account. The firm just announced a 5 percent stock dividend. What will the balance be in the retained earnings account after the dividend?

Accepted Answer

The stock dividend is 5% of 6,500 shares, which is 325 shares. The market value per share is $26.50, so the total value of the dividend is 325 * $26.50 = $8,612.50. The retained earnings account will decrease by this amount, so the new balance is $142,900 - $8,612.50 = $134,287.50.

Question 3

Homer, Inc. is expected to pay dividends of $100 per share at the end of one year and $100 at the end of the second year. The dividend in the second year is a liquidating dividend and the firm will cease to exist. Investors require a 12% return on investments of this type. There are 100 shares of stock outstanding. The firm is considering an alternate dividend policy that will pay out $120 in dividends per share the first year. Under the alternative plan, any shortfall in funds will be raised by selling new equity. There are no taxes, transaction costs, or other market imperfections.

What will be Homer's stock price once the alternate dividend plan is adopted?

Accepted Answer

The answer of Homer, Inc. is expected to pay dividends...

Question 4

Nelson's Inc. is considering a $120,000 stock repurchase. Currently there are 10,000 shares outstanding at a market price of $30. The P/E ratio is 15. What is the EPS after the stock repurchase?

Accepted Answer

The EPS after the stock repurchase can be calculated by first determining the number of shares repurchased and then calculating the new EPS. With $120,000 and a share price of $30, Nelson's Inc. can repurchase 4,000 shares ($120,000 / $30), leaving 6,000 shares outstanding (10,000 - 4,000). The current earnings (E) can be found from the P/E ratio and the market capitalization before the repurchase. The market cap is $300,000 (10,000 shares * $30/share), and with a P/E ratio of 15, the earnings are $20,000 ($300,000 / 15). The new EPS is then $20,000 / 6,000 shares = $3.33.

Question 5

An Edmonton firm has a market value equal to its book value. Currently, the firm has excess cash of $1,040 and other assets of $6,950. Equity is worth $4,800. The firm has 240 shares of stock outstanding and net income of $410. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

Accepted Answer

The answer of An Edmonton firm has a market value...

Question 6

Lucky Mike's, Inc. has a target debt/equity ratio of 0.75. After-tax earnings for 2009 were $850,000 and the firm needs $1,150,000 for new investments. If the company follows a residual dividend policy, what dividend will be paid?

Accepted Answer

Under a residual dividend policy, dividends are paid from leftover earnings after all profitable investment opportunities are funded. With a target debt/equity ratio of 0.75, the equity portion of the $1,150,000 investment is $657,143. Subtracting this from $850,000 earnings leaves $192,857 for dividends.

Question 7

Down River Express has 5,000 shares of stock outstanding with a par value of $1.00 per share. The current market value of the firm is $390,000. The balance sheet shows a paid in surplus account value of $122,000 and retained earnings of $216,000. The company just announced a 2-for-1 stock split. What will the paid in surplus account balance be after the split?

Accepted Answer

A 2-for-1 stock split doubles the number of shares outstanding but does not affect the paid in surplus account balance. It remains at $122,000.

Question 8

Bob's Auto Group has 25,000 shares of stock outstanding at a market price of $4.50 per share. What will the market price per share be if the company does a 1-for-5 reverse stock split?

Accepted Answer

The answer of Bob's Auto Group has 25,000 shares of...

Question 9

Spruce Corporation had 2,200,000 shares outstanding at the beginning of the year, with a book value of $7,150,000. As well, its retained earnings at the start of the year was $900,000. On March 1, the company declared a $0.50 dividend per share. On August 1, it then issued a 10% stock dividend at a time when shares were trading at $3.75. Net income of $3 per share was reported at the end of the year. Determine the value of the company's shareholders' at the end of the year.

Accepted Answer

The value of shareholders' equity at the end of the year is calculated by adding the beginning book value, net income, and the effects of dividends. The cash dividend reduces retained earnings by $1,100,000 (2,200,000 shares x $0.50). The stock dividend increases shares by 220,000 (10% of 2,200,000), but does not affect total equity. Net income adds $6,600,000 (2,200,000 shares x $3). The final equity is $7,150,000 + $6,600,000 - $1,100,000 = $12,650,000. Adding the initial retained earnings of $900,000 gives $13,550,000. The stock dividend's market value ($3.75 x 220,000) is $825,000, which is added to the book value, resulting in $14,375,000. However, the correct calculation should consider the net income and dividends properly, leading to $15,035,000.

Question 10

You own stock in a Toronto firm that has 1.25 million shares outstanding. The current stock price is $13.50 per share. If the company issues a 10% stock dividend, what would you expect the stock price to be after the dividend is paid?

Accepted Answer

The correct answer is A because the stock price will decrease after the stock dividend is paid. The total value of the company remains the same, but the number of shares outstanding increases, so the price per share decreases.

Question 11

Shirley's Restaurants has 35,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $9 per share. The balance sheet shows $112,000 in the capital in excess of par account, $35,000 in the common stock account and $68,000 in the retained earnings account. The firm just announced a 5 percent (small) stock dividend. What will total owners' equity be after the dividend?

Accepted Answer

The answer of Shirley's Restaurants has 35,000 shares of stock...

Question 12

Ricardo owns 642 shares of Sonic Automotive stock. The company recently issued a statement that it will pay a $1.25 per share dividend this year and a $1.50 per share dividend next year. Ricardo does not need the cash from the dividend this year but does need as much cash as possible next year. He earns an average of 7 percent on his savings so that is the required return he established for this stock. Ignoring taxes, what will Ricardo's homemade dividend per share be next year?

Accepted Answer

Ricardo can reinvest this year's dividend of $1.25 per share at his average savings rate of 7%. To find the future value of this year's dividend next year, we use the formula for future value: FV = PV(1 + r)^n, where PV is the present value, r is the rate, and n is the number of periods. Here, PV = $1.25, r = 7% or 0.07, and n = 1 year. So, FV = $1.25 * (1 + 0.07)^1 = $1.25 * 1.07 = $1.3375. Next year, he will also receive a dividend of $1.50 per share. Therefore, the total homemade dividend per share next year will be $1.3375 + $1.50 = $2.8375, which rounds to $2.84.

Question 13

Mark bought 100 shares of XYZ stock on January 5 at $12.05 per share. XYZ declared a $0.30 per share dividend on February 24 with a record date of Friday, March 24 and a payment date of April 15. Mark sold his 100 shares on March 22 at a price of $13.22 a share. How much did Mark make on this investment?

Accepted Answer

The answer of Mark bought 100 shares of XYZ stock...

Question 14

Smith Cleaning Services has 20,000 shares of stock outstanding at a market price of $8 a share. What will the market price per share be if the company does a 1-for-3 reverse stock split?

Accepted Answer

The answer of Smith Cleaning Services has 20,000 shares of...

Question 15

Homer, Inc. is expected to pay dividends of $100 per share at the end of one year and $100 at the end of the second year. The dividend in the second year is a liquidating dividend and the firm will cease to exist. Investors require a 12% return on investments of this type. There are 100 shares of stock outstanding. The firm is considering an alternate dividend policy that will pay out $120 in dividends per share the first year. Under the alternative plan, any shortfall in funds will be raised by selling new equity. There are no taxes, transaction costs, or other market imperfections.

What is Homer's stock price before the alternative dividend plan is adopted?

Accepted Answer

The answer of Homer, Inc. is expected to pay dividends...

Question 16

Morgan's has 9,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $9 per share. The balance sheet shows $9,000 in the common stock account, $21,000 in the capital in excess of par account, and $40,500 in the retained earnings account. The firm just announced a 100 percent (large) stock dividend. What is the value of the common stock account after the dividend?

Accepted Answer

A 100 percent stock dividend means the number of shares will double, so the new total shares will be 18,000. Since the par value is $1.00 per share, the value of the common stock account after the dividend will be 18,000 shares * $1.00 per share = $18,000.

Question 17

David's had a retained earnings balance at the end of last year of $220,000. The firm had $63,000 in earnings this year and $120,000 in capital spending. David's maintains a debt-equity ratio of 2.2 and strictly adheres to a residual dividend policy. What is the retained earnings balance at the end of this year?

Accepted Answer

The answer of David's had a retained earnings balance at...

Question 18

Numberg Corporation has a stock price of $2.5. It is expected that the company will announce a 1 for 8 reverse split. Given this information, determine the price of the stock after the reverse split.

Accepted Answer

In a 1 for 8 reverse split, each shareholder ends up with 1 share for every 8 shares they previously held. The price of the stock is adjusted so that the value of the shareholder's investment remains the same. Therefore, the new price is $2.5 * 8 = $20.00.

Question 19

A firm has a market value equal to its book value. Currently, the firm has excess cash of $400 and other assets of $7,600. Equity is worth $8,000. The firm has 200 shares of stock outstanding and net income of $900. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after the dividend is paid?

Accepted Answer

The answer of A firm has a market value equal...

Question 20

A firm has a market value equal to its book value. Currently, the firm has excess cash of $300 and other assets of $8,700. Equity is worth $9,000. The firm has 375 shares of stock outstanding and net income of $800. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after the dividend is paid?

Accepted Answer

The earnings per share (EPS) calculation is not affected by the payment of a dividend. EPS is calculated as net income divided by the number of shares outstanding. Given that the net income is $800 and there are 375 shares outstanding, the EPS is $800 / 375 = $2.13.

Quiz 17: Dividends and Dividend Policy